Question

Q1. Hat Inc. is thinking of investing in a new machine to produce baseball caps.  The new machine will cost $1M and will last for 4 years.  At the end of 4 years salvage value is estimated at $100k.  Executives believe they will be able to generate $750k in sales next year. COGS are estimated to be 35% of sales.  Fixed costs for the production are $150K.  Sales are projected to grow by 15% each year from years 2-4.  Net working capital requirements are as follows: $140K, $170K, $190K, $160K in years 1-4 respectively.  Hat Inc. uses straight line depreciation, has a tax rate of 20%, and a required rate of return of 13%. Find the NPV and IRR of investing in the new machine.

Q2. XYZ company is considering building a new office building.  XYZ already owns a plot of land worth $2M and has paid an architectural firm $300k for building designs.  Construction cost for the building is $1M.  Projected rent income from the building is $400k/year and interest expense will be $300k/year.  After three years XYZ expects to sell the building and land for $2.5M.  If XYZ has a required rate of return of 10%, what is the NPV and IRR of building the office building?

Please show step by step how to calculate

Answer 1

As per policy, only one question is allowed to answer at a time, so answering Q1 here :

NPV:
Year	Cash flow	Sales	COGS	FC	DEP	EBT	TAX	EAT	CASH FLOW	DISCOU 13%	PV	DIS 12%	PV
0	-1000000								-1000000	1	-1000000
1	-140000	750000	262500	150000	225000	112500	22500	90000	175000	0.885	154875	0.893	156275
2	-30000	862500	301875	150000	225000	185625	37125	148500	343500	0.783	268960.5	0.797	273769.5
3	-20000	991875	347156.3	150000	225000	269718.8	53943.75	215775	420775	0.693	291597.1	0.712	299591.8
4	30000	1140656.25	399229.7	150000	225000	366426.6	73285.31	293141.3	548141.25	0.613	336010.6	0.636	348617.8
Working Capi									160000	0.613	98080	0.636	101760
Salvage						100000	20000	80000	80000	0.613	49040	0.636	50880
NPV											198563.2
PV FOR IRR											1198563		1230894
IRR = 12% + (1230894-1000000)/(1230894-1198563) (13-12)%
IRR = 12% + 7.14% = 19.14%